2020 (1) TMI 1038 - HC - Income Tax

Allocation of the R D expenditure to the Pondy unit - whether no such products were manufactured by the Pondy unit during the relevant year for which research was carried out by R D unit? - HELD THAT - Two products namely DIANOUM/RETARD tablets and NOVOLID tablets were manufactured by the Pondicherry unit not in the relevant year, for which research was done by research and development unit during the relevant year and expenditure, if any, was incurred in the preceding year. Therefore, there could not have been apportionment of the current year s expenditure to the Pondicherry unit. It ought to have been appreciated that when research was helpful for other units, the question of apportionment of the expenditure to the Pondicherry unit would not arise. This fact can also be ascertained from the books of accounts of the Pondicherry unit. Thus, if the product is manufactured by other unit of the appellant, then only allocation of research and development expenses to the other unit is justified. Therefore, the first substantial question of law framed is answered in favour of the assessee and against the revenue. Deduction u/s 35(1) - tribunal justification in not excluding the capital expenditure from the total R D expenditure of ₹ 1.99 crores while allowing the expenditure on R D between the other units - HELD THAT - Section 35(1) of the Act provides that in respect of expenditure on scientific research, the deductions made therein namely expenditure laid down or expended on the scientific research related to the business and an amount equal to one and one and a half times of any sum paid to a research association which has its object, the undertaking of scientific research or to a university, college or other institution to be used for scientific research. Since the amount of ₹ 99 lakhs was expended towards research and development, therefore, in view of Section 30(1) of the Act, the same ought to have been excluded from the total capital expenditure of ₹ 1.99 crores while allowing the expenditure on Research and development units. Accordingly, the second substantial question of law is answered in favour of the assessee Computation of deduction u/s 80HHC has to be done by reducing the deduction under Section 80-IB for the purpose of ascertaining eligible profit - tribunal was right in not following the principle laid down by the Hon ble Supreme Court in the case of JCIT Vs. Mandideep Engineering Packaging Industry Pvt. Ltd. 2006 (4) TMI 75 - SUPREME COURT while quantifying the deduction under Section 80HHC - HELD THAT - Issue to be answered in favour of the assessee subject to the decision of the issue involved in the aforesaid substantial questions of law which is pending adjudication before the Supreme Court. Needless to state that depending on the view taken by the Supreme Court, the revenue shall be at liberty to take an action against the appellant, if so advised in accordance with law.

Summary

Issues:
1. Allocation of R&D expenditure to Pondy unit without relevant products being manufactured.
2. Exclusion of capital expenditure from total R&D expenditure.
3. Computation of deduction under Section 80HHC.
4. Application of principles laid down by the Supreme Court in quantifying deduction under Section 80HHC.

Analysis:

Issue 1: Allocation of R&D expenditure to Pondy unit
The appellant challenged the allocation of research and development (R&D) expenditure to the Pondicherry unit when no products were manufactured by that unit during the relevant year for which research was conducted. The court found that the products developed through R&D were not manufactured by the Pondicherry unit in the relevant year. The court emphasized that allocation of expenditure to a unit should be based on the utility of R&D for that unit. It was concluded that the apportionment to the Pondicherry unit was not justified, and the first substantial question of law was answered in favor of the assessee.

Issue 2: Exclusion of capital expenditure from total R&D expenditure
The appellant argued that capital expenditure of ?99 lakhs should have been excluded from the total R&D expenditure of ?1.99 crores. The court referred to Section 35(1) of the Income Tax Act, which provides for deductions related to scientific research expenditure. It was held that the capital expenditure should have been excluded from the total R&D expenditure while allowing expenses on R&D units. Consequently, the second substantial question of law was answered in favor of the assessee.

Issue 3: Computation of deduction under Section 80HHC
The court addressed the computation of deduction under Section 80HHC and the interplay with Section 80-IB for ascertaining eligible profit. The matter was considered in light of pending issues before the Supreme Court, and the third and fourth substantial questions of law were answered in favor of the assessee, subject to the Supreme Court's decision.

Conclusion
The High Court quashed the order of the Income Tax Appellate Tribunal dated 30.10.2009 and disposed of the appeal in favor of the assessee based on the analysis of the issues related to the allocation of R&D expenditure, exclusion of capital expenditure, and computation of deductions under Sections 80HHC and 80-IB. The court provided detailed reasoning for each issue, ensuring a comprehensive examination of the legal aspects involved in the case.